Saturday, November 17, 2012

Fracking, Free Enterprise and Federalism

Why did fracking arise in the United States? Contrary to some analysts, Professor Merrill does not believe it is attributable to federally funded research and development. What little funding for drilling technologies the federal government has provided has been fairly tangential. This does not mean federal policy has been irrelevant, however. The federal government has provided special tax credits for the drilling of unconventional natural gas which almost certainly facilitated the early development of the technology as early frackers developed and improved fracking techniques.

Professor Merrill also doubts industry structure has much to do with fracking’s rise either. However much major oil companies like to tout their commitment to innovation, the majors played a minor role in developing this technology. It was largely developed by smaller players in the industry.

A more likely factor is the way U.S. law treats subsurface rights. The U.S. is something of an outlier in that subsurface minerals are the property of the landowner, and not the government. This results in decentralized ownership and control over subsurface rights facilitates experimentation and innovation in figuring out how to exploit and manage subsurface resources.

Further decentralization, and experimentation, results from the federalist regulatory structure. Different states have different regulatory approaches than others, creating opportunities for further innovation and the opportunity for jurisdictions to learn from one another. The existence of a few jurisdictions that will allow a new technology to be tried provides a laboratory from which others may learn, whereas under a more centralized regulatory structure such innovation is unlikely to get off the ground.

The existence of a relatively open infrastructure network – a pipeline system that is subject to common-carrier rules – also plays a role in facilitating entry into the market. These factors have a common theme: decentralization. Taken together, Merrill suggests, they are the most likely source of fracking’s rise in the Unites